It keeps going, and going, and going. I'm talking about the stock of Circuit City (NYSE:CC). It's up 70% over the last year, and for all the analysts' skepticism, no one in investorland seems to think this electronics retailer has seen its best days yet. Come Monday morning, we'll find out who's right, when Circuit City reports its fiscal Q1 2007 results.

What analysts say:

  • Buy, sell, or waffle? Twenty-seven analysts monitor Circuit City, but the vast majority of them are ambivalent about the stock. Five rate it a buy, two a sell ... and 20 a hold.
  • Revenues. Analysts expect Circuit City to report $2.5 billion in sales, an 11% improvement over last year.
  • Earnings. Even better, they're predicting $0.01 per share in profit, as opposed to last year's quarterly loss.

What management says:
On May 17, Circuit City gave an investor presentation update on its current status and future plans. Rather than run through the report myself, I'll just point you to Alyce Lomax's fine write-up. For those too busy to click through, though, the gist is that the State of the City is fine -- but the housing market is going through the roof. Alyce cites Circuit City's rich valuation of 39 times earnings (now down just a tad to 38 times) as good reason to hold off on purchasing these shares for now.

What management does:
Over the last 18 months, Circuit City hasn't just grown its sales at a respectable rate, but also doubled its average net margins. How did the company become twice as profitable as it was? Primarily by containing operating costs. Over the last six months, the cost of the goods Circuit City sells have risen in tandem with revenue growth (both up 14%). Operating costs, however, have increased just 4% -- boosting operating margins considerably, and dropping the savings all the way to the bottom line.

Margins %




























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Circuit City's management of working capital has been less successful, but not terrible. In the past six-month period that I reviewed, sales again rose 14%. Accounts receivable outgrew that only slightly at 15%, while Circuit City held its inventory growth to a more modest 12%.

Comparing Circuit City's margins to those of its nemesis, Best Buy (NYSE:BBY), I suspect that the case for the former being a "turnaround story" in progress, which analysts have been arguing for months, has some merit. Circuit City's operating and net margins are on an upswing, but both represent just fractions of the profitability that higher-quality retailer Best Buy achieves -- meaning there's plenty of room for improvement at Circuit City.

However, I can't help but notice that while Best Buy's margins are rising across the board -- at the gross, operating, and net levels -- Circuit City is currently deriving all of its improved profitability from cost-cutting at the operational level. Meanwhile, its gross margins are stuck in the mid-24s, and are in fact running slightly lower today than they were 18 months ago. To me, this suggests a lack of pricing power at Circuit City -- one that Best Buy doesn't seem to face, and one that, unless remedied, must ultimately put a period at the end of this turnaround story. At some point, a company just runs out of fat to be cut.


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Fool contributor Rich Smith owns shares of Dell but of no other company named above.